CH-07: Audit Objectives, Procedures, Evidence, and Documentation
D.
A. Detect kiting activities that may otherwise not be discovered. B. Provide the data necessary to prepare a proof of cash. C. Request that a cutoff bank statement and related check be sent to the auditor. D. Seek information about other deposit and loan amount that come to the attention of the institution in the process of completing the confirmation.
B.
1. All the information used by the auditor in arriving at the conclusions on which the audit opinion is based is called A. Audit information B. Audit evidence C. Accounting records D. Corroborating information
D.
10. Which of the following generalizations does not relate to the reliability of audit evidence? A. Audit evidence is more reliable when it is obtained from independent sources outside the entity. B. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference. C. Audit evidence that is generated internally is more reliable when the related controls imposed by the entity are effective. D. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on audit evidence obtained at a reasonable cost.
A.
100. The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cutoff were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a A. Sale in the current period. B. Purchase in the current period. C. Sale in the subsequent period. D. Purchase return in the subsequent period.
A.
101. PSA 501 states that when inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding its existence and condition by attendance at physical inventory counting unless impracticable. Which of the following statements concerning this audit procedure is incorrect? A. Regardless of the inventory system operated by the client, an annual physical count must be made of each item in the inventory, and test counts must be made by the auditor. B. Inventories located in public warehouses may be verified by direct confirmation in writing from the custodians, provided that, depending on the materiality of these inventories, additional procedures are applied as deemed necessary. C. When the well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts, the auditor's observation procedures usually can be performed either during or after the end of the period under audit. D. The independent auditor, when asked to audit financial statements covering the current period and one or more periods for which he/she had not observed or made some physical counts, may be able to become satisfied as to such prior inventories through appropriate alterna- tive procedures.
C.
102. Which of the following audit procedures probably provides the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories? A. Inspect the open purchase order file for significant commitments that should be considered for disclosure. B. Trace test counts noted during the entity's physical count to the entity's summarization of quantities. is pledged as collateral or subject to any liens. C. Inspect agreements to determine whether any inventory D. Select the last few shipping advice used before the physical count and determine whether the shipments were recorded as sales.
A.
103. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items A. Répresented by inventory tags are included in the listing. B. Represented by inventory tags are bona fide. C. Included in the listing have been counted. D. Incduded in the listing are represented by inventory tags.
B.
104. When outside firms of nonaccountants specializing in the taking of physical inventories are used to count, list, price, and subsequently compute the total peso amount of inventory on hand at the date of the physical count, the auditor will ordinarily A. Consider the reduced audit effort with respect to the physical count of inventory as a scope limitation. B. Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions. C. Consider the report of the outside inventory-taking firm to be an acceptable alternative procedure to the observation of physical inventories. D. Not reduce the extent of work on the physical count of inventory.
C.
105. Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventories at interim dates? A. Inventory balances are rarely at low levels. B. Complete recounts by independent teams are performed. C. Perpetual inventory records are maintained. D. Unit cost records are integrated with production accounting records.
B.
106. Purchase cutoff procedures should be designed to test whether all inventory A. Purchased and received before year-end was paid for. B. Purchased and received before year-end was recorded. C. Owned by the company is in the possession of the company at year-end. D. Ordered before year-end was received.
A.
107. Which of the following is the best audit test to evaluate the accuracy of the inventory records for materials inventory in a production operation? A. Reconcile quantities on hand per physical counts of selected items with perpetual inventory records and verify pricing. B. Trace selected inventory receipts to perpetual inventory records. C. Vouch selected postings in the perpetual inventory records to source documents. D. Perform turnover tests for materials inventory.
C.
108. An auditor is most likely to learn of slow-moving inventory through A. Inquiry of sales personnel. B. Inquiry of warehouse personnel. C. Review of perpetual inventory records. D. Physica! observation of inventory.
C.
109. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference? A. Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets. B. An item purchased "FOB shipping point" had not arrived yet at the date of the inventory count and had not been reflected in the perpetual records. C. Credit memos for several items returned by customers had not been recorded. D. No journal entry had been made on the retailer's books for several items returned to its suppliers.
D.
11. Which of the following statements concerning audit evidence is false? A. The auditor uses professional judgment and exercises professional skepticism in evaluating the quantity and quality of audit evidence, and thus its sufficiency and appropriateness, to support the audit opinion. B. The auditor ordinarily finds it necessary to rely on audit evidence that is persuasive rather than conclusive. C. Informing the audit opinion, the auditor does not examine all the information available because conclusions ordinarily can be reached by using sampling approaches and other means of selecting items for testing. D. The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for committing the test.
D.
110. Which of the following audit procedures most likely would provide assurance about a manufacturing entity's inventory valuation? A. Tracing test counts to the entity's inventory listing. B. Reviewing shipping and receiving cutoff procedures for inventories. C. Obtaining confirmation of inventories pledged under loan agreements. D. Testing the entity's computation of standard overhead rates.
A.
111. Which of the following is not one of the auditor's primary objectives in an audit of trading securities? A. To determine whether securities are authentic. B. To determine whether securities actually exist. C. To determine whether securities are the property of the client. D. To determine whether securities are properly classified on the balance sheet.
C.
112. A company makes a practice of investing excess short-term cash in trading securities that are traded regularly on the Philippine Stock Exchange (PSE). A reliable test of the valuation of those securities is A. Calculation of premium or discount amortization. B. Confirmation of securities held by the broker. C. Consideration of current market quotations. D. Recalculation of investment value using a valuation model.
A.
113. Which of the following is the most effective audit procedure for verification of dividends earned on investments in equity securities? A. Reconciling amounts received with published dividend records. B. Recomputing selected extensions and footings of dividend schedules and comparing totals to the general ledger. C. Comparing dividends received in the current year with that of the preceding year. D. Tracing deposited dividend checks to the cash receipts book.
D.
114. Which of the following audit procedures would give the least assurance of the existence of securities held by the entity? A. Confirmation from the custodian. B. Simultaneous count of liquid assets. C. Vouching all changes during the year to supporting documentation. D. Examination of paid checks issued in payment of securities purchased.
A.
115. In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions of existence and A. Rights and obligations B. Completeness C. Presentation and disclosure D. Valuation and allocation
B.
116. In establishing the existence and ownership of an investment held by a corporation in the form of publicly-traded stock, an auditor should inspect the securities or A. Determine that the investment is carried at the lower of cost or market. B. Confirm the number of shares owned that are held by an independent custodian. C. Inspect the audited financial statements of the investee company. D. Obtain written representations from management confirming that the securities are properly classified as trading securities.
A.
117. The auditor is making an assessment as to whether the client has adopted the appropriate accounting policy for its investment in the voting stock of the investee. The auditor should obtain evidence primarily by A. Inquiries to the client as to whether the client has the ability to exercise significant influence over the financial and operating policy decisions of the investee. B. Direct confirmation with the investee about the control or influence that can be exercised by the client. C. An independent, third party's opinion concerning the potential influence or control that can be exercised by the client over the investee. D. Comparison of the number of shares held by the investor with the investee's number of shares outstanding according to the written confirmation.
B.
118. Which of the following provides the best form of evidence pertaining to the annual valuation of an investment in which the client owns a 30% voting Interest? A. Historical cost of the investee company's assets. B. Audited financial statements of the investee company. C. Current fair value of the investee company's assets. D. Market quotations of the Investee company's stock.
C.
119. An auditor is most likely to verify the interest earned on bond investments by A. Verifying the receipt and deposit of interest checks. B. Testing controls relevant to cash receipts. C. Recomputing the interest earned on the basis of face amount, interest rate, and period held. D. Confirming the bond interest rate with the issuer of the bonds.
A.
12. In representing that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework, management implicitly or explicitly makes regarding the recognition, measurement, presentation, and disclosure of the various elements of financial statements and related disclosures. A. Assertions B. Allegations C. Conclusions D. Assurances
A.
120. The auditor can best verify a client's bond sinking fund transactions and year-end balance by A. Confirmation with the bond trustee. B. Confirmation with individual holders of retired bonds, C. Examination and count of the bonds retired during the year. D. Recomputation of interest expense, interest payable, and amortization of bond discount or premium.
A.
121. In the audit of property, plant, and equipment, the auditor tries to do all of the following except to A. Assess the adequacy of replacement funds. B. Obtain an understanding of internal control. C. Determine the extent of property abandoned during the year. D. Judge the reasonableness of the depreciation.
B.
122. Which of the following combinations of procedures is an auditor most likely to perform to obtain evidence about fixed asset additions? A. Confirming ownership and corroborating transactions through inquiries of client personnel. B. Inspecting documents and physically examining assets. C. Recomputing calculations and obtaining written management representations. D. Observing operating activities and comparing balances to prior period balances.
C.
123. If an auditor tours a production facility, which of the following misstatements or questionable practices is most likely to be detected by the audit procedure specified? A. Depreciation expense on fully depreciated machinery has been recognized. B. Insurance coverage on the facility has lapsed. C. Necessary facility maintenance has not been performed. D. Overhead has been overapplied.
B.
124. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all A. Expenditures for property and equipment have been recorded in the proper period. B. Expenditures for property and equipment have not been charged to expense. C. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period. D. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
A.
125. Determining that proper amounts of depreciation are expensed provides assurance about management's assertions of valuation and allocation and A. Presentation and disclosure B. Existence C. Completeness D. Rights and obligations
D.
126. The auditor is least likely to learn of retirements of equipment through-which of the following? A. Review of depreciation. B. Analysis of the debits to accumulated depreciation account. C. Review of insurance policy riders. D. Review of the purchase returns and allowances account.
B.
127. One audit procedure for an audit of facilities and equipment is to test the accuracy of recorded depreciation. Which of the following is the best source of evidence that the equipment in question is in service? A. A review of inventory documentation for the equipment. B. A comparison of depreciation schedules with the maintenance and repair logs for the same equipment. C. A comparison of depreciation schedules with a listing of insurance appraisals for the same equipment. D. A review of depreciation policies and procedures.
A.
128. When few property and equipment transactions occur during the year, the continuing auditor usually obtains an understanding of the related internal controls and performs A. Extensive tests of current year property and equipment transactions. B. Tests of controls. C. Analytical procedures to substantiate current year additions to property and equipment. D. A thorough examination of the balances at the beginning the current year.
B.
129. In violation of a company policy, Victoria Company erroneously capitalized the cost of painting its warehouse. The auditor examining Victoria's financial statements will most likely detect this misstatement when A. Observing, during the physical inventory observation, that the warehouse had been painted. B. Examining the construction work orders supporting items capitalized during the year. C. Examining maintenance expense accounts. D. Discussing capitalization policies with Victoria's controller.
D.
13. The auditor is required to use assertions for classes of transactions, account balances, and presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures. Assertions about classes of transactions include occurrence, completeness, accuracy, cutoff, and A. Valuation and allocation B. Rights and obligations C. Existence D. Classification
A.
130. During an audit of a publicly held company, the auditor should obtain written confirmation regarding debenture transactions from the A. Trustee B. Client's attorney C. Debenture holders D. Internal auditors
B.
131. A bond trust indenture is the contractual agreement between the bondholders and the issuing company. In an audit of bonds payable, an auditor expects the trust indenture to include the A. Subscription list. B. Description of the collateral. C. Effective yield of the bonds issued. D. Issuing company's debt-to-equity ratio at the time of issuance.
D.
132. An auditor's program to audit long-term debt should include steps that require A. Verifying the existence of the bondholders. B. Inspecting the accounts payable subsidiary ledger. C. Investigating credits to the bond interest income account. D. Examining bond trust indentures.
C.
133. In auditing long-term bonds payable, an auditor most likely will A. Confirm the existence of individual bondholders at year-end. B. Perform analytical procedures on the bond premium and discount accounts. C. Compare interest expense with the bond payable amount for reasonableness. D. Examine documentation of assets purchased with bond proceeds for liens.
B.
134. An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertion about A. Existence B. Presentation and disclosure C. Completeness D. Valuation and allocation
D.
135. In the audit of a medium-sized manufacturing concern, which one of the following areas can be expected to require the least amount of audit time? A. Revenue B. Assets C. Liabilities D. Shareholders' equity
A.
136. In an audit of shareholders' equity, an auditor is most concerned that A. Share capital transactions are properly authorized. B. All changes in the shareholders' equity accounts are monitored by an independent transfer agent and registrar. C. Share splits are charged to retained earnings at par or stated value. D. Dividends declared during. the year were approved by the shareholders.
C.
137. Which of the following transactions would not require a debit to retained earnings? A. An appropriation of retained earnings for treasury shares. B. A 5% stock dividend. C. A two-for-one share split D. A 25% stock dividend
B.
138. The auditor is concerned with establishing that dividends are paid to client corporation shareholders owning shares as of the A. Payment date B. Record date C. Declaration date D. Issue date
A.
139. When a client company does not maintain its own share records, the auditor should obtain written confirmation from the transfer agent and registrar concerning A. The number of shares issued and outstanding. B. Restrictions on the payment of dividends. C. The number of shares subject to agreements to repurchase. D. Guarantees of preference share liquidation value.
D.
14. The following are assertions about account balances at the period end, except A. Existence B. Rights and obligations C. Valuation and allocation D. Cutoff
D.
140. If the client corporation has a material amount of treasury shares on hand at year-end, the auditor should A. Count the certificates only if the company reports treasury shares as an asset. B. Not count the certificates if treasury shares are reported as a deduction from total shareholders' equity. C. Count the certificates only if the company had material treasury share transactions during the year. D. Count the certificates at the same time other securities are counted.
B.
141. During an audit of a company's shareholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or law. This audit procedure most likely is intended to verify management's assertion of A. Existence B. Presentation and disclosure C. Completeness D. Valuation and allocation
C.
142. An audit program for the retained earnings account should include a step that requires verification of the A. Gain or loss resulting from disposition of treasury shares. B. Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable. C. Authorization for both cash and stock dividends. D. Fair value used to charge retained earnings to account for a two-for-one share split.
B.
143. In auditing payroll, an auditor most likely would A. Observe entity employees during a payroll distribution. B. Compare payroll costs with entity standards and budgets. C. Trace individual employee deductions to entity journal entries. D. Verify that checks representing unclaimed wages are mailed.
A.
144. An auditor is most likely to perform substantive tests of details on payroll transactions and balances when A. Analytical procedures indicate unusual fluctuations in recurring payroll entries. B. Cutoff tests indicate a substantial amount of accrued payroll expense. C. The assessed level of control risk relative to payroll transactions is low. D. Accrued payroll expense consists primarily of unpaid commissions.
B.
145. Which of the following audit procedures would provide the least relevant evidence in determining that payroll payments were made to bona fide employees? A. Reconcile time cards in use to employees on the job. B. Test the payroll account bank reconciliation by tracing outstanding checks to the payroll register. C. Examine canceled checks for proper endorsement and compare with personnel records. D. Test for segregation of the authorization for payment from the hire/fire authorization.
D.
146. One payroll audit objective is to determine whether the employees received pay in amounts recorded in the payroll journal. To achieve this objective, the auditor should A. Determine whether a proper segregation of duties exists between recording payroll and reconciling the payroll bank account. B. Requesting that a company official distribute all paychecks. C. Reconcile the payroll bank account. D. Compare canceled payroll checks with the payroll journal.
B.
147. Substantive procedures for payroll transactions and balances primarily focus on analytical procedures to identify unexpected fluctuations in recurring payroll entries. Which of the following is an appropriate analytical procedure for payroll? A. Reconcile the payroll bank account. B. Compare the relationship of hours worked and payroll with that of the preceding year. C. Inspect authorization on time cards. D. Compare authorized wage rates with payroll records.
A.
148. To check the accuracy of hours worked, an auditor would ordinarily compare clock cards with A. Shop job time tickets B. Personnel records C. Time recorded in the payroll register D. Labor variance reports
C.
149. An auditor found that employee time cards in one department are not properly approved by the supervisor. Which of the following could occur? A. Payroll checks might not be distributed to the appropriate payees. B. The wrong hourly rate could be used to calculate gross pay. C. Employees might be paid for hours they did not work. D. Duplicate paychecks might be issued.
D.
15. The following are assertions about presentation and disclosure, except A. Occurrence and rights and obligations B. Accuracy and valuation C. Classification and understandability D. Existence
A.
150. As used in PSA 230 (Audit Documentation), it refers to the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached. A. Audit documentation B. Audit file C. Audit planning memorandum D. Management letter.
D.
151. According to PSA 230, working papers may be in the form of data stored on paper or on electronic or other media. Working papers I. Assist in the planning and performance of the audit. II. Assist in the supervision and review of the audit work. III. Record the audit evidence resulting from the audit work performed to support the auditor's opinion. A. I and II only B. II and III only C. I and III only D. I, II, and III
C.
152. The following statements relate to the form and content of working papers. Which is false? A. The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit. B. The auditor should include in the working papers information on planning the audit work; the nature, timing, and extent of the audit procedures performed and the results of such procedures; and the conclusions drawn from the audit evidence obtained. C. Working papers should include documentation of every matter the auditor considers during the audit. D. Working papers should include the auditor's reasoning on all significant matters which require the exercise of judgment, together with his/her conclusion thereon.
A.
153. The primary purpose of audit working papers is to A. Provide evidence of the planning and execution of audit procedures performed. B. Comply with the Philippine Standards on Auditing (PSAS). C. Document weaknesses in internal control with recommendations to management for improvement. D. Serve as a means for the preparation of the financial statements.
D.
154. Working papers that record the procedures used by the auditor to gather audit evidence should be A. Destroyed when the audited entity ceases to be a client. B. Considered the primary support for the financial statements being audited. C. Viewed as the connecting link between the books of accounts and the financial statements. D. Designed to meet the circumstances of the particular engagement.
B.
155. Which of the following conditions constitutes inappropriate working paper preparation? A. Tick marks explained in working papers. B. All forms and directives used by the client are included in the working papers. C. Flowcharts are included in the working papers. D. Findings are cross-referenced to supporting documentation.
A.
156. Which of the following factors would least likely affect the form, content, and extent of an auditor's working papers? A. The content of the representation letter. B. The identified risks of material misstatement. C. The audit methodology and tools used. D. The significance of the audit evidence obtained.
A.
157. An auditor's working papers will ordinarily be least likely to include documentation showing how the A. Client's schedules were prepared. B. Unusual matters were resolved. C. Understanding of the client's internal control was obtained and control risk was assessed. D. Engagement was planned.
B.
158. Which of the following is usually included or shown in the auditor's working papers? A. The procedures used by the auditor to verify the personal financial status of members of the client's management team. B. The manner in which exceptions and unusual matters disclosed by the auditor's procedures were resolved or treated. C. Analyses that are designed to be a part of, or an attribute for, the client's accounting records. D. Excerpts from authoritative pronouncements that support the financial reporting framework used in preparing the financial statements.
C.
159. Audit working papers are indexed by means of reference numbers. Which of the following is the primary purpose of indexing? A. Determine that working papers adequately support findings, conclusions, and reports. B. Support the audit opinion. C. Permit cross-referencing and simplify supervisory review. D. Eliminate the need for follow-up reviews.
A.
16. Which of the following statements concerning the auditor's use of assertions is correct? A. The auditor may combine the assertions about transactions and events with the assertions about account balances. B. In every audit engagement, the auditor should use the assertions as described in PSA 500, i.e., the assertions should always fall into three categories: assertions about classes of transactions and events, account balances, and presentation and disclosure. C. There should always be a separate assertion related to cutoff of transactions and events. D. The completeness assertion deals only with whether all transactions and events that should have been recorded have been recorded.
A.
160. Although the quantity and content of audit working papers vary with each particular engagement, an auditor's permanent files most likely include A. Analyses of share capital and other shareholders' equity elements. B. Schedules that support the current year's adjusting entries. C. Prior years' accounts receivable confirmations that were classified as exceptions. D. Documentation indicating that the audit work was adequately planned and supervised.
C.
161. The audit working paper that reflects the major components of an amount reported in the financial statements is the A. Supporting schedule B. Interbank transfer schedule C. Lead schedule D. Carryforward schedule
A.
162. Which of the following analyses appearing in a predecessor's working papers is the successor auditor least likely to be interested in reviewing? A. Analysis of income statement accounts. B. Analysis of noncurrent assets and liabilities. C. Analysis of current assets and liabilities. D. Analysis of shareholders' equity accounts.
B.
163. An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for A. Cash flow increases and decreases. B. Reclassifications and adjustments. C. Audit objectives and assertions. D. Reconciliations and tickmarks.
A.
164. Auditors often use standardized working papers primarily because they allow working papers to be prepared more A. Efficiently B. Accurately C. Neatly D. Professionally
A.
165. Using personal computers in auditing may affect the methods used to review the work of staff assistants because A. Working paper documentation may not contain readily observable details of calculations. B. The quality control standards may differ. C. Documenting the supervisory review may require assistance of consulting services personnel D. Supervisory personnel may not have an understanding of the capabilities and limitations of personal computers.
A.
166. Audit documentation is the record of audit procedures performed, relevant audit evidence, and the auditor's conclusions. Which of the following statements concerning audit documentation is incorrect? A. Audit documentation should include superseded drafts of working papers and financial statements. B. Audit documentation prepared after the performance of the audit work is likely to be less accurate than documentation prepared at the time such work is performed. C. Audit documentation may include abstracts or copies of the entity's records such as significant and specific contracts and agreements. D. Audit documentation is not a substitute for the entity's accounting records.
C.
167. The auditor shall assemble the audit documentation in a/an A. Working paper B. Workpaper C. Audit file D. Audit memorandum
B.
168. The auditor is required to complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor's report. The time limit within which to complete the assembly of the audit file is ordinarily A. Not more than 30 days after the date of the auditor's report. B. Not more than 60 days after the date of the auditor's report. C. Not more than 90 days after the end of the entity's reporting period. D. Not more than 60 days after the date the entity's financial statements are authorized for issue.
D.
169. Audit documentation may be recorded on paper or on electronic or other media. The following are examples of audit documentation, except A. Audit programs B. Letters of confirmation and representation C. Correspondence (including e-mail) concerning significant matters D. The entity's accounting records
C.
17. Which of the following statements concerning audit objectives is incorrect? A. The auditor should resolve any substantial doubt about any of management's material financial statement assertions. B. Selection of tests to meet audit objectives should depend upon the understanding of internal control. C. There should be a one-to-one relationship between audit objectives and procedures. D. Audit objectives should be developed in light of management assertions about the financial statement elements.
A.
170. The completion of the assembly of the final audit file after the date of the auditor's report does not ordinarily involve A. The performance of new audit procedures or the drawing of new conclusions. B. Sorting, collating and cross-referencing working papers. C. Deleting or discarding superseded documentation. D. Signing off on completion checklists relating to the file assembly process.
C.
18. The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement addresses the verification of A. Cutoffs B. Authorizations C. Transactions D. Costs
A.
19. Which of the following would least likely affect the appropriateness of evidence available to an auditor? A. The sampling method employed by the auditor to obtain a sample of such evidence. B. The relevance of such evidence to the financial statement assertion being verified. C. The relationship of the preparer of such evidence to the entity being audited. D. The timeliness of such evidence.
C.
2. An entity's accounting records generally include the records of initial entries and supporting records induding A. Confirmations from third parties. B. Information obtained by the auditor from such audit procedures as inquiry, observation, and inspection. C. Worksheets and spreadsheets supporting cost allocations. D. Other information developed by, or available to, the auditor to permit him/her to reach conclusions through valid reasoning.
D.
20. Which of the following forms of documentary evidence would be considered the most reliable by an auditor? A. Internally generated B. Prenumbered C. Easily duplicated D. Authorized by a responsible official
C.
21. The objective of tests of details of transactions performed as substantive tests is to A. Attain assurance about the reliability of the accounting system. B. Evaluate whether management's policies and procedures operated effectively. C. Detect material misstatements in the financial statements. D. Comply with Philippine Standards on Auditing (PSAs).
D.
22. In testing the existence assertion for an asset, an auditor ordinarily works from the A. Potentially unrecorded items to the financial statements. B. Financial statements to the potentially unrecorded items. C. Supporting evidence to the accounting records. D. Accounting records to the supporting evidence.
B.
23. In determining whether transactions have been recorded the direction of the audit testing should be from the A. General journal entries B. Original source documents C. General ledger balances D. Adjusted trial balance
A.
24. Which of the following audit procedures consists of looking at a process or procedure being performed by others? A. Observation B. Inspection of records and documents C. Inspection of tangible assets D. Inquiry
C.
25. Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion? A. Materiality B. Audit risk C. Auditor judgment D. Reasonable assurance
C.
26. The auditor should apply analytical procedures I. As risk assessment procedures. II. As substantive procedures. III. In the overall review at the end of the audit. A. I and II only B. II and III only C. I and III only D. I, II, and III
D.
27. Analytical procedures include the consideration of comparisons of the entity's financial information with I. Comparable information for prior periods. II. Anticipated results of the entity. III. Similar industry information. A. I and II only B. II and III only C. I and III only D. I, II, and III
D.
28. When of the following should be considered by the auditor when designing and performing analytical procedures as substantive procedures? I. The suitability of using substantive analytical procedures given the assertions. II. The reliability of the data, whether internal or external, from which the expectation of recorded amounts or ratios is developed. III. Whether the expectation is sufficiently precise to identify a material misstatement at the desired level of assurance. IV. The amount of any difference of recorded amounts from expected values that is acceptable. A. I, II and III only B. I, III, and IV only C. II, III, and IV only D. I, II, III, and IV
A.
29. The following statements relate to the use of analytical procedures as substantive procedures. Which is false? A. Substantive analytical procedures are applicable when there is only a small volume of transactions. B. The application of substantive analytical procedures is based on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary. C. The presence of relationships among data provides evidence as to the completeness, accuracy, and occurrence of transactions captured in the information produced by the entity's information system. D. Reliance on the results of substantive analytical procedures will depend on the auditor's assessment of the risk that the analytical procedures may identify relationships as expected when, in fact, a material misstatement exists.
D.
3. Audit evidence comprises I. Information that supports and corroborates management's assertions. II. Any information that contradicts management's assertions. A. I only В. II only C. Neither I nor II D. Both I and II
C.
30. Which of the following should be considered by the auditor in determining the suitability of substantive analytical procedures given the assertions? I. The assessment of the risk of material misstatement. II. Any tests of details directed toward the same assertion. A. I only B. II only C. Both I and II D. Neither I nor II
D.
31. The reliability of data is influenced by its source and by its nature and is dependent on the circumstances under which it is obtained. Which of the following should the auditor consider in determining whether data is reliable for purposes of designing substantive analytical procedures? I. Source of the information available. II. Comparability of the information available. III. Nature and relevance of the information available. IV. Controls over the preparation of the information. A. I, III, and IV only B. II, III, and IV only C. I, II, and III only D. I, II, III, and IV
A.
33. The following are the auditor's principal objectives in the audit of revenues, except A. To determine whether all cash owned by the entity at the balance sheet date is included on the balance sheet. B. To determine whether earned revenue has been recorded and recorded revenue has been earned. C. To determine whether revenues are reported in the income statement at the appropriate amounts. D. To determine whether revenues are properly classified, described, and disclosed in the financial statements, including notes, in conformity with an applicable financial reporting framework.
A.
34. Auditors are often concerned with the possibility of overstatement of sales and receivables. However, management may also have reasons for understating these balances. Which of the following would explain understatement of sales and receivables? I. To avoid paying taxes. II. To windowdress the financial statements. III. To meet budgets and forecasts. A. I only В. II only C. I and III only D. I, II, and III
D.
35. In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate? A. Bank charges B. Equipment C. Bonds payable D. Sales
A.
36. Which of the following might be detected by an auditor's review of the entity's sales cutoff? A. Inflated sales for the year. B. Lapping of year-end accounts receivable. C. Unrecorded sales discounts. D. Excessive goods returned for credit.
C.
37. An auditor most likely would review a client's periodic accounting for the numerical sequence of shipping documents and sales invoices to support management's financial statement assertion of A. Existence B. Rights and obligations C. Completeness D. Valuation and allocation
B.
38. If the objective of a test of details of transactions is to detect overstatements of sales, the auditor's direction of testing should be from the A. Cash receipts journal to the sales journal. B. Accounting records to the source documents. C. Source documents to the accounting records. D. Sales journal to the cash receipts journal.
D.
39. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of A. Accuracy B. Classification C. Rights and obligations D. Cutoff
B.
4. As defined in PSA 500, ______ is an individual or organization possessing the expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements. A. Auditor's expert B. Management's expert C. Auditor's internal expert D. Auditor's external expert
B.
40. An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting A. Beginning and ending inventory balances. B. Cash receipts and accounts receivable. C. Cutoffs of sales and purchases. D. Shipping and receiving activities.
D.
41. Tracing bills of lading to sales invoices provides evidence that A. Invoiced sales were shipped. B. Recorded sales were shipped. C. Shipments to customers were recorded as sales. D. Shipments to customers were invoiced.
A.
42. The auditor finds a situation in which one person has the ability to collect receivables, make deposits, issue credit memos, and record receipt of payments. The auditor suspects the individual may be stealing cash receipts. Which of the following audit procedures would be most effective on discovering fraud in this scenario? A. Perform a detailed review of debits to sales discounts, sales returns and allowances, or other debit accounts, excluding cash posted to the cash receipts journal. B. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the cash receipts journal. C. Send negative confirmations to all outstanding accounts receivable customers. D. Send positive confirmations to a random selection of customers.
C.
43. Which of the following most likely would give the most assurance concerning the valuation and allocation assertion of accounts receivable? A. Vouching amounts in the subsidiary ledger to details on shipping documents. B. Inquiring about receivables pledged under loan agreements. C. Assessing the allowance for bad debts for reasonableness. D. Comparing receivable turnover ratios with industry statistics for reasonableness.
D.
44. Which of the following is not a principal objective in auditing accounts receivable? A. To determine whether receivables are carried at their net realizable value. B. To determine whether receivables are properly classified, described, and disclosed in the financial statements, including notes, in accordance with the applicable financial reporting framework. C. To determine whether the entity has real claims in all receivables on the balance sheet. D. To determine whether the accounts are collected by the balance sheet date.
C.
45. A large university has relatively ineffective internal control. To obtain assurance that all tuition revenue has been recorded, the auditor should A. Confirm a sample of tuition payments with the students. B. Prepare a year-end bank reconciliation. C. Compare business office revenue records with registrar's office records of students enrolled. D. Observe tuition payment procedures on a surprise basis.
B.
46. The process of obtaining and evaluating audit evidence through a direct communication from a third party in response to a request for information about a particular item affecting assertions made by management in the financial statements is called A. Reperformance B. External confirmation C. Inquiry D. Recalculation
C.
47. The confirmation of customers' accounts receivable rarely provides reliable evidence about the valuation assertion because A. Customers may not be inclined to report understatement errors in their accounts. B. Auditors typically select many accounts with low recorded balances to be confirmed. C. It is not practicable to ask the customer to confirm detailed information relating to its ability to pay the account. D. Recipients usually respond only if they disagree with the information on the request.
A.
48. Auditors may use positive and/or negative forms of confirmation requests. An auditor most likely will use A. The negative form for small balances. B. The positive form, when the combined assessed level of inherent and control risk for related assertions is acceptably low, and the negative form when it is unacceptably high. C. The positive form to confirm all balances regardless of size. D. A combination of the two forms, with the positive form used for trade balances and the negative form for other balances.
C.
49. The following statements relate to the use of negative confirmation requests. Which is true? A. Negative confirmation requests are effective when detection risk is low. B. Unreturned negative confirmation requests indicate that alternative procedures are necessary. C. Unreturned negative confirmation requests rarely provide significant explicit evidence. D. Negative confirmation requests are effective when understatements of account balances are suspected.
D.
5. If a management's expert's work is used to prepare the information to be used as audit evidence, the auditor shall I. Evaluate the competence, capabilities and objectivity of the management's expert. II. Obtain an understanding of the work of the management's expert. III. Evaluate the appropriateness of the management's expert's work as audit evidence for the relevant assertion. A. I and II only B. I and III only C. II and III only D. I, II, and III
D.
50. In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely would be included with the client's confirmation letter? A. An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct. B. An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor. C. A client-prepared letter remaining the customer that a nonresponse will cause a second request to be sent. D. A client-prepared statement of account showing the details of the customer's account balance
B.
51. Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipient? A. "This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope." B. "If you do not report any differences within 15 days, it will be assumed that this statement is correct." C. "The following invoices have been selected for confirmation and represent amounts that are overdue." D. "Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records."
A.
52. An auditor confirms a representative number of open accounts as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor is most likely to learn of which of the following? A. One of the cashiers has been covering a personal embezzlement by lapping. B. The credit manager has misappropriated remittances from customers whose accounts have been written off. C. One of the sales clerks has not been preparing charge slips for credit sales to family and friends. D. One of the computer processing control clerks has been removing all sales invoices applicable to his account from the data file.
B.
53. During the process of confirming receivables as of December 31, 200A, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 6, 200B." The auditor will most likely A. Reconfirm the zero balance as of January 7, 200B. B. Verify that the amount was received. C. Determine whether a cash discount was taken by the customer. D. Determine whether there were any changes in the account between January 1 and January 6, 200B.
A.
54. A company has computerized sales and cash receipts journals. The computer programs for these journals have been properly debugged. The auditor's examination of the accounting records revealed that the total of the accounts receivable subsidiary accounts differs materially from the accounts receivable control account. This discrepancy could indicate A. Credit memoranda being improperly recorded. B. Statements being intercepted prior to mailing. C. Lapping of receivables. D. Receivables not being properly aged.
C.
55. To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would A. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted. B. Consider the faxes to be nonresponses and evaluate them as unadjusted differences. C. Verify the sources and contents of the faxes in telephone calls to the senders. D. Examine the shipping documents that provide evidence for the existence assertion.
C.
56. PSA 505 defines confirmation as "the process of obtaining and evaluating audit evidence through a representation of information or an existing condition directly from a third party in response to a request for information about a particular item affecting assertions in the financial statements or related disclosures." Two assertions for which confirmation of accounts receivable balances provides primary evidence are A. Completeness and valuation and allocation. B. Valuation and allocation and rights and obligations. C. Rights and obligations and existence. D. Existence and completeness.
C.
57. For accounts receivable, negative confirmation is less effective than positive confirmation because A. Some recipients may report incorrect balances that require extensive follow-up. B. A majority of recipients usually lack the willingness to respond objectively. C. The auditor cannot infer that all nonrespondents have verified their account information. D. Negative confirmations do not produce evidence that is statistically quantifiable.
A.
58. Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? A. Inspect the shipping records documenting the merchandise sold to the debtors. B. Review the cash receipts journal for the month prior to year-end. C. Intensify the study id internal control concerning the revenue cycle. D. Increase the assessed level of detection risk for the existence assertion.
B.
59. Which of the following is the most effective procedure for determining the collectibility of an account receivable? A. Confirmation of the account. B. Review of the subsequent cash collections. C. Review of authorization of credit sales to the customer and the previous history of collections. D. Examination of the related sales invoice(s).
D.
6. Which of the following statements concerning the management's expert's competence, capabilities, and objectivity is correct? A. Objectivity relates to the ability of the management's expert to exercise the competence in the circumstances. B. Competence relates to the possible effects that bias, conflict of interest or the influence of others may have on the professional or business judgment of the management's expert. C. Capability relates to the nature and level of expertise of the management's expert. D. The management's expert's competence, capabilities, and objectivity are important factors in relation to the reliability of any information prepared by the management's expert.
D.
60. An auditor reconciles the total of the accounts receivable December 31. By this procedure, the auditor is most likely subsidiary ledger to the general ledger control account as of to learn of which of the following? A. An account balance is past due and should be written off. B. A December invoice was improperly computed. C. A December check from a customer was posted in error to the account of another customer with a similar name. D. An opening balance on a subsidiary ledger account was improperly carried forward from the previous accounting period.
B.
61. Once a CPA has determined that accounts receivable have increased because of slow collections in a tight money environment, the CPA is likely to A. Review the entity's credit and collection policy. B. Expand tests of collectibility. C. Review the going concern ramifications. D. Increase the balance in the allowance for bad debts account.
D.
62. All of the following are examples of substantive procedures to verify the valuation of net accounts receivable, except the A. Comparison of the allowance for bad debts with past records. B. Recomputation of the allowance for bad debts. C Inspection of the aging schedule and credit records of past due accounts. D. Inspection of accounts for current versus noncurrent status in the statement of financial position.
D.
63. The most likely reason for the auditor to be concerned about the valuation of cash is that A. The proof of cash cannot be reconciled. B. The client uses a checking account. C. Both currency and negotiable securities are on hand. D. The client has foreign currency accounts.
C.
64. When counting cash on hand, the auditor must exercise control overall cash and other negotiable assets to prevent A. Theft B. Deposits in transit C. Substitution D. Irregular endorsement
A.
65. The best evidence regarding year-end bank balances is documented in the A. Bank reconciliations B. Interbank transfer schedule C. Cash in bank lead schedule D. Cutoff bank statement
B.
66. Which of the following sets of information does an auditor usually confirm on one form? A. Accounts receivable and accrued interest receivable. B. Cash in bank and collateral for loans. C. Accounts payable and purchase commitments. D. Inventory on consignment and contingent liabilities.
A.
68. Which of the following items is not requested on a standard bank account balance confirmation form? A. The principal amount paid on a direct liability. B. Maturity date of a direct liability. C. Description of collateral for a direct liability. D. The interest rate of a direct liability.
B.
69. Which of the following is not considered an objective of the audit of cash? A. Cash is stated at its realizable value. B. Compensating cash balances are reported as other current assets. C. Cash is properly classified, described, and disclosed in the financial statements, including notes, in accordance with the applicable financial reporting framework. D. The client has ownership rights in the reported cash.
D.
7. Audit evidence is information used to draw reasonable conclusions on which to base the auditor's opinion. Audit evidence is obtained by performing I. Risk assessment procedures II. Further audit procedures A. I only В. II only C. Either I or II D. Both I and II
D.
70. The purpose of a proof of cash is to A. Validate that the client's bank did not make an error during the period being examined. B. Confirm that the client has properly separated the custody function from the recording function with respect to cash. C. Prove that the client's year-end balance of cash is fairly stated. D. Determine whether any unauthorized disbursements or unrecorded deposits were made for the given time period.
B.
71. An internal auditor would be concerned about the possibility of fraud if A. Only one person has access to the petty cash fund. B. Cash receipts, net of the amounts used to pay petty cash-type expenditures, are deposited in the bank daily. C. The monthly bank statement reconciliation is performed by the same employee who maintains the perpetual inventory records. D. The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are maintained by the same person.
B.
72. Purchase cutoff procedures test the completeness assertion. An entity should include goods in its inventory if it A. Has paid for the goods. B. Holds legal title to the goods. C. Has physical possession of the goods. D. Has sold the goods.
C.
73. In auditing accounts payable, an auditor's procedures most likely will focus primarily on management's assertion of A. Existence B. Valuation and allocation C. Completeness D. Presentation and disclosure
A.
74. Which of the following is the primary audit test to determine if accounts payable are valued properly? A. Vouching accounts payable to supporting documentation. B. An analytical procedure. C. Verification that accounts payable are reported as a current liability in the balance sheet. D. Examination of cash disbursements subsequent to year-end.
A.
75. Which of the following procedures is least likely to be performed before the balance sheet date? A. Search for unrecorded liabilities. B. Confirmation of accounts receivable. C. Attendance at the physical inventory count D. Testing internal control over cash.
B.
76. An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all A. Receiving reports B. Vendors' invoices C. Canceled checks D. Merchandise received
D.
77. Which of the following is a substantive procedure that an auditor would most likely perform to verify the existence and valuation of recorded accounts payable? A. Confirming accounts payable balances with known suppliers who have zero balances. B. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for. C. Receiving the client's mail, unopened, for a reasonable period of time after year-end to search for unrecorded vendor's invoices. D. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
B.
78. When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely is A. Amounts recorded in the accounts payable subsidiary ledger. B. Vendors with whom the entity has previously done business. C. Invoices filed in the entity's open invoice file. D. Payees of checks drawn in the month subsequent to the balance sheet date.
B.
79. Unrecorded liabilities are most likely to be found during the review of which of the following documents? A. Bills of lading B. Unpaid bills C. Unmatched sales invoices D. Shipping records
C.
8. Which of the following statements concerning audit evidence is correct? A. Appropriateness is the measure of the quantity of audit evidence. B. Sufficiency is the measure of the quality of audit evidence, that is, its relevance and reliability. C. The quantity of audit evidence needed is affected by its quality and the risk of misstatement. D. The sufficiency and appropriateness of audit evidence are not interrelated.
C.
80. Which of the following audit procedures is least likely to detect an unrecorded liability? A. Reading the minutes of meetings of the board of directors. B. Analysis and recomputation of interest expense. C. Analysis and recomputation of depreciation expense. D. Mailing of bank confirmation forms.
A.
81. When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of a purchase cutoff will encounter the greatest difficulty in gaining assurance with respect to the A. Quality B. Quantity C. Price D. Terms
D.
82. Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A. Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. B. Examining unusual relationships between monthly accounts payable balances and recorded cash payments. C. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. D. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to prior period.
A.
83. In a payables application, checks are authorized and paid based on matching purchase orders, receiving reports, and vendor invoices. Partial payments are common. An appropriate audit procedure for verifying that a purchase order has not been paid twice is to sort the A. Check register file by purchase order, compute total amounts paid by purchase order, compare total amounts paid with purchase order amounts, and investigate any discrepancies between the total amounts paid and purchase order amounts. B. Receiving report file by vendor invoice amounts and investigate any discrepancies between the total amounts received and vendor invoice amounts. C. Vendor invoice file by purchase order, compute total amounts invoiced by purchase order, compare total amounts invoiced with purchase order amounts, and investigate any discrepancies between the total amounts involved and purchase order amounts. D. Receiving report file by purchase order, compute total amounts received by purchase order, compare total amounts received with purchase order amounts, and investigate any discrepancies between the total amounts received and purchase order amounts.
B.
84. Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the client's employees? A. Mail confirmations for selected account balances. B. Prepare a schedule of accounts payable. C. Test footings in the accounts payable ledger. D. Reconcile unpaid invoices to vendors' statements.
C.
85. In an audit of a purchasing department, which of the following usually is considered a risk factor? A. Purchase specifications are developed by the department requesting the material. B. Purchases are not rotated among suppliers included on an approved vendor list. C. Purchases are made from parties related to buyers or other company officials. D. Purchases are made against blanket or open purchase orders for certain types of items.
B.
86. The following statements compare confirmation of accounts payable with vendors and confirmation of accounts receivable with customers. Which is false? A. As compared with the confirmation of accounts receivable, the confirmation of accounts payable will tend to emphasize accounts with zero balances at the balance sheet date. B. Statistical sampling techniques are more appropriate in the confirmation of accounts receivable than in the confirmation of accounts payable. C. It is less likely that the confirmation request sent to the vendor will show the amount owed than that the request sent to the customer will show the amount due. D. Confirmation of accounts receivable with customers is a more widely accepted auditing procedure than is confirmation of accounts payable with vendors.
A.
87. Which of the following procedures would an auditor least likely perform before the balance sheet date? A. Confirmation of accounts payable B. Identification of related parties C. Assessment of control risk D. Attendance at the physical inventory count
A.
88. Which of the following statements concerning the auditor's attendance at the physical inventory count is incorrect? A. A financial statement audit should always include attendance at the physical inventory count. B. If the auditor is unable to attend the physical inventory count on the date planned due to unforeseen circumstances, he/she should take or observe some physical counts on an alternative date and, when necessary, perform audit procedures on intervening transactions. C. Where attendance is impracticable, due to factors such as the nature and location of the inventory, the auditor should consider whether alternative procedures provide sufficient appropriate audit evidence of existence and condition to conclude that reference to a scope limitation need not be made. D. Inventories that are under the custody and control of third parties (for example, inventories located in public warehouses) may be verified by obtaining direct confirmation from the custodians, provided that, depending on the materiality of the amount involved, additional procedures should be applied as deemed necessary.
D.
89. PSA 501 states that in planning attendance at the physical inventory count, the auditor considers the risks of material misstatement related to inventory as well as the nature of the internal control related to inventory. Which of the s lowing would the auditor also consider? I. Whether adequate procedures are expected to be e tablished and proper instructions issued for the physica inventory count. II. The timing of the count. III. The locations at which inventories are held. IV. Whether an expert's assistance is to be sought. A. I and IV only B. II and III only C. II, III, and IV only D. I, II, III, and IV
B.
9. Which of the following statements concerning audit evidence is correct? A. An audit usually involves the authentication of documentation. B. A given set of procedures may provide audit evidence that is relevant to certain assertions, but not others. C. Audit evidence obtained from an independent external source is always reliable. D. An entity's accounting records can be sufficient audit evidence to support the financial statements.
D.
90. According to PSA 501, when inventories are under the custody and control of a third party, the auditor would ordinarily obtain direct confirmation from the third party as to the quantities and condition of inventories held on behalf of the entity. Which of the following would the auditor also consider? I. The integrity and independence of the third party. II. Observing, or arranging for another auditor to observe, the physical inventory count. III. Obtaining another auditor's report on the adequacy of the third party's internal control for ensuring that inventories are correctly counted and adequately safeguarded. IV. Inspecting documentation regarding inventories held by third parties (for example, warehouse receipts) or obtaining confimation from other parties when such inventories have been pledged as collateral. A. I, II, and IV only B. I, III, and IV only C. II, III and IV only D. I, II, III and IV
D.
91. In an audit of inventories, an auditor is least likely to verify that A. The client has used proper inventory pricing. B. Damaged goods and obsolete items have been properly accounted for. C. The financial statement presentation of inventories is appropriate. D. All inventory owned by the client is on hand at the time of the count.
C.
92. An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of A. Existence B. Rights and obligations C. Completeness D. Valuation and allocation
A.
93. An auditor is most likely to inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of A. Presentation and disclosure B. Existence C. Completeness D. Valuation and allocation
A.
94. If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded A. Purchases B. Sales C. Sales discounts D. Purchase discounts
B.
95. A client maintains perpetual inventory records in both quantities titles and pesos. If the assessed level of control risk is high. an auditor will probably A. Increase the extent of tests of controls relevant to the inventory cycle. B. Request the client to schedule the physical inventory count at the end of the year. C. Apply gross profit tests to ascertain the reasonableness of the physical counts. D. Insist that the client perform physical counts of inventory items several times during the year.
C.
96. While obtaining an understanding of the client's internal control system in the production cycle, management stated that the sale of scrap was well controlled. Which of the following is the best audit procedure to verify this assertion? A. Interviewing persons responsible for collecting and storing the scrap. B. Comparing current revenue from scrap sales with that of prior periods. C. Comparing the quantities of scrap expected from the production process with the quantities sold. D. Comparing the results of a physical inventory of scrap on hand with perpetual inventory records.
B.
97. To obtain evidence as to the reasonableness and completeness of inventory balances, auditors often perform analytic procedures. Which of the following quantitative relationships is not applicable to inventory balances? A. Number of days' sales in inventory B. Debt-to-equity ratio C. The gross profit percentage D. Inventory turnover ratios
A.
98. An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure and A. Valuation and allocation B. Completeness C. Rights and Obligations D. Existence
D.
99. An auditor's attendance at the physical inventory at the client's main plant at year-end provides direct evidence to support which of the following objectives? A. Accuracy of the priced-out inventory. B. Determination of goods in the hands of consignees. C. Evaluation of lower of cost or net realizable value test. D. Identification of obsolete or damaged merchandise to evaluate allowance (reserve) for obsolescence.
C.
According to PSA 520, when analytical procedures identify significant fluctuations or relationships that are inconsistent with other relevant information or that deviate from predicted amounts, the auditor should investigate and obtain adequate explanations and appropriate corroborative audit evidence. The auditor's investigation of unusual fluctuations and relationships ordinarily begins with inquiries of management, followed by I. Corroboration of management's responses. II. Consideration of the need to apply other audit procedures based on the results of such inquiries, if management is unable to provide an explanation or if the explanation is not considered adequate. A. I only B. II only C. Both I and II D. Neither I nor II
